ICO Law: Ways To Structure An ICO So It’s Not A Security

June 28, 2018

The SEC has spoken: Some cryptocurrencies qualify as securities, in and of themselves; others, like Bitcoin and Ethereum, don’t. Let’s break it down.

SEC Crypto Securities Stance: Most ICO Altcoins Are Securities; Bitcoin and Ethereum Aren’t

Moving forward, the Securities and Exchange Commission will likely treat most cryptocurrencies, which are specially developed for investment ICOs, as securities. As such, they’ll fall under the SEC’s purview and coin purveyors must conform to regulatory conventions.

William Hinman, an SEC division head, explained at the Yahoo All Markets Summit: “Central to determining whether a security is being sold is how it is being sold and the reasonable expectations of purchasers.”  Hinman suggested that if a buyer, upon buying a given coin, expects an eventual third party payout, then the token probably falls into the securities column.

Why Doesn’t The SEC Categorize Bitcoin and Ethereum As Securities?

So, why doesn’t the SEC sort “first gen” cryptocurrencies, like Bitcoin and Ethereum, into the Securities House? It comes down to their decentralized structures. Essentially, since “no central party determines its progress” they fall short of the securities classification.

Notably, however, at the conference, Hinman didn’t mention the legally beleaguered Ripple (XRP), a “first-gen-ish” coin currently combating a securities-related lawsuit.

Ways To Structure Compliant, Non-Security ICOs

Startups with ICO plans, however, should not give up hope. Hinman also said it is possible to structure ICOs in ways that would keep them off the securities’ track. For example: Tokens designed as consumer items, not investments, would probably clear the hurdle — as would membership-based offerings.

“We stand prepared to provide more formal interpretive or no-action guidance about the proper characterization of a digital asset in a proposed use,” he said.

Contact An ICO Lawyer In Chicago

Are you a startup considering an ICO? Its structure could mean the difference between success and an SEC censure. To avoid the latter, our cryptocurrency law team will thoroughly review your business plan, and then develop compliant frameworks that will keep you off the SEC’s radar.

Additionally, thanks to our in-house, tax law practice, we can also craft a tax position that leverages deductions, credits, exemptions, and offshore options, to ensure you remain as profitable as possible.

Get in touch today. Let’s get to work.



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